Heavyweights taking the star turn in 2011

Fund managers expect large cap stocks to outperform smaller peers this year as investors look to pocket gains on market minnows amid the prospect of further global market uncertainty.

Big cap leaders extended their gains on the juniors following impressive quarterly production reports from mining companies Rio Tinto and Fortescue Metals, which drove the broader market higher.

The benchmark S&P/ASX 200 index cancelled out all of Monday’s losses to close above the crucial 4800-mark for the second time in three sessions to finish 38.7 points higher at 4801.8 yesterday.

The S&P/ASX 50 index has rallied 1.21 per cent this year, compared to the Small Ordinaries which is just 0.74 per cent higher.

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Wilson Asset Management head of research Chris Stott said the main reason small caps had underperformed in the year to date was because small resources had taken a turn.

“Small resources, which have rolled over a bit, drove last year’s outperformance, rising almost 50 per cent from 1 July to 31 December."

Mr Stott noted that small resources have been weaker this financial year, primarily due to concerns about China’s decelerating rate of growth. The nation tightened overnight lending rates by 50 basis points on Friday night and boosted the reserve requirements of its lenders, in a bid to contain inflation, which the nation will report in monthly consumer price inflation and quarterly economic growth data due this week.

He said the small cap miners tend to fluctuate significantly more than the large caps because of their higher beta, and believes that for this calendar year, they will underperform small industrials.

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Stocks that Wilson Asset Management prefers in the small industrials sector include payment collections service Credit Corp and consumer goods maker Breville Group.

“We think that
Credit Corp
, a debt collector which trades on an attractive multiple and has a good management team, is a stock that will benefit from an environment when unemployment is low and the population continue to be more conscious of paying down their debt quickly post-GFC."

Wilson said
Breville
Group’s US strategy, growth into department stores and the net cash position on its balance sheet makes it attractive.

“We like the higher margins over there and it’ll also be interesting to see how things play out with GUD, which is on the share register and lobbed a bid that was intervened by the ACCC (Australian Competition & Consumer Commission) last year."

Unlike Mr Stott, Smallco Investment Manager managing director Rob Hopkins said 2011 will be a difficult year for both large and small industrials.

“There are two macro themes pushing against them being a spike in interest rates, given talk of a 76 basis point rise this year, as well as the strength of Australian dollar, which really hurts anyone in the export market," he said.Yesterday, trading without a lead from US markets, closed for a public holiday, Australian shares reversed their poor start to the week, up by almost the exact margin lost on Monday

Mr Hopkins said the strong mining boom had clouded the macro-economic factors, and noted that Smallco did not look closely at small resources due to the sector’s volatility, lack of diversification past one asset or commodity, and the difficulty of predicting commodity prices.

“There’s no doubt [small caps] will find it hard to compete against the bigger stocks because it is certainly looking like the US will recover somewhat this year, and small companies have no exposure to this at all," he said, adding that it would be a difficult year for fund mangers.

In the past six months Smallco found it increasingly difficult to identify small industrials to get excited about, which is testament to 15 per cent of their portfolio currently sitting in cash.

Another ten per cent of Smallco’s portfolio is invested in small mining services companies and Mr Hopkins said the firm was still cautious in the sector due to the reliance on commodity prices.

“Everyone’s conscious things will continue strongly but commodity prices could come under some pressure once the current undersupply situation is rectified and when supply does finally match demand."

Smallco, which can hold 20 per cent of its portfolio in the large cap sector, believes the large caps will outperform the small caps overall this year, albeit not significantly.

In the domestic market, healthcare, materials, financials and energy paved the way forward, while telecommunications was the only sector to finish in the red.

The broader All Ordinaries added 39 points to 4911.6.

Across the region, Japan’s Nikkei added 0.27 per cent to 10531.54, Hong Kong’s Hang Seng added 0.75 per cent to 24339.27 and China’s Shanghai Composite shed 1.47 per cent to 2704.63, consolidating its 3.03 per cent decline on Monday to its lowest point in more than three months.

BHP Billiton added the most points to the index, up 32¢ to $45.62, while Rio Tinto gained 92¢ to $86.80 after its global iron ore operations set a new quarterly production record at 65Mt and a new annual record at 239Mt.

Fortescue Metals Group also benefited from its quarterly update, jumping 54¢ to $7.27.

Moly Mines shed 30.5¢ to $1.10 after project financing from its major shareholder Hanlong Mining Investment fell through. Separately, Hanlong recently appointed current Ampella Mining chairman Peter Mansell as chairman and head of its iron ore business.